https://www.beckershospitalreview.com/finance/fitch-affirms-aa-on-virtua-health-s-revenue-bonds.html
Fitch Ratings affirmed its “AA-” rating on Marlton, N.J.-based Virtua Health’s revenue bonds, affecting a total of $605 million of debt.
The affirmation is a result of several factors, including the health system’s solid liquidity growth, strong market position, favorable operating margins, sizable clinical platform and moderate debt burden.
The outlook is stable.
https://www.forbes.com/sites/robertpearl/2017/11/07/hospitals-losing-millions/#67f501c67b50
A strange thing happened last year in some the nation’s most established hospitals and health systems. Hundreds of millions of dollars in income suddenly disappeared.
This article, part two of a series that began with a look at primary care disruption, examines the economic struggles of inpatient facilities, the even harsher realities in front of them, and why hospitals are likely to aggravate, not address, healthcare’s rising cost issues.
According to the Harvard Business Review, several big-name hospitals reported significant declines and, in some cases, net losses to their FY 2016 operating margins. Among them, Partners HealthCare, New England’s largest hospital network, lost $108 million; the Cleveland Clinic witnessed a 71% decline in operating income; and MD Anderson, the nation’s largest cancer center, dropped $266 million.
How did some of the biggest brands in care delivery lose this much money? The problem isn’t declining revenue. Since 2009, hospitals have accounted for half of the $240 billion spending increase among private U.S. insurers. It’s not that increased competition is driving price wars, either. On the contrary, 1,412 hospitals have merged since 1998, primarily to increase their clout with insurers and raise prices. Nor is it a consequence of people needing less medical care. The prevalence of chronic illness continues to escalate, accounting for 75% of U.S. healthcare costs, according to the CDC.
Part Of The Problem Is Rooted In The Past
From the late 19th century to the early 20th, hospitals were places the sick went to die. For practically everyone else, healthcare was delivered by house call. With the introduction of general anesthesia and the discovery of powerful antibiotics, medical care began moving from people’s homes to inpatient facilities. And by the 1950s, some 6,000 hospitals had sprouted throughout the country. For all that expansion, hospital costs remained relatively low. By the time Medicare rolled out in 1965, healthcare consumed just 5% of the Gross Domestic Product (GDP). Today, that number is 18%.
Hospitals have contributed to the cost hike in recent decades by: (1) purchasing redundant, expensive medical equipment and generating excess demand, (2) hiring highly paid specialists to perform ever-more complex procedures with diminishing value, rather than right-sizing their work forces, and (3) tolerating massive inefficiencies in care delivery (see “the weekend effect”).
How Hospital CEOs See It
Most hospital leaders acknowledge the need to course correct, but very few have been able to deliver care that’s significantly more efficient or cost-effective than before. Instead, hospitals in most communities have focused on reducing and eliminating competition. As a result, a recent study found that 90% of large U.S. cities were “highly concentrated for hospitals,” allowing those that remain to increase their market power and prices.
Historically, such consolidation (and price escalation) has enabled hospitals to offset higher expenses. As of late, however, this strategy is proving difficult. Here’s how some leaders explain their recent financial struggles:
“Our expenses continue to rise, while constraints by government and payers are keeping our revenues flat.”
Brigham Health president Dr. Betsy Nabel offered this explanation in a letter to employees this May, adding that the hospital will “need to work differently in order to sustain our mission for the future.”
A founding member of Partners HealthCare in Boston, Brigham & Women’s Hospital (BWH) is the second-largest research hospital in the nation, with over $640 million in funding. Its storied history dates back more than a century. But after a difficult FY 2016, BWH offered retirement buyouts to 1,600 employees, nearly 10% of its workforce.
Three factors contributed to the need for layoffs: (1) reduced reimbursements from payers, including the Massachusetts government, which limits annual growth in healthcare spending to 3.6%, a number that will drop to 3.1% next year, (2) high capital costs, both for new buildings and for the hospital’s electronic health record (EHR) system, and (3) high labor expenses among its largely unionized workforce.
“The patients are older, they’re sicker … and it’s more expensive to look after them.”
That, along with higher labor and drug costs, explained the Cleveland Clinic’s economic headwinds, according to outgoing CEO Dr. Toby Cosgrove. And though he did not specifically reference Medicare, years of flat reimbursement levels have resulted in the program paying only 90% of hospital costs for the “older,” “sicker” and “more expensive” patients.
Of note, these operating losses occurred despite the Clinic’s increase in year-over-year revenue. Operating income is on the upswing in 2017, but it remains to be seen whether the health system’s new CEO can continue to make the same assurances to employees as his predecessor that, “We have no plans for workforce reduction.”
“Salaries and wages and … and increased consulting expenses primarily related to the Epic EHR project.”
Leaders at MD Anderson, the largest of three comprehensive cancer centers in the United States, blamed these three factors for the institution’s operational losses. In a statement, executives attributed a 77% drop in adjusted income last August to “a decrease in patient revenues as a result of the implementation of the new Epic Electronic Health Record system.”
Following a reduction of nearly 1,000 jobs (5% of its workforce) in January 2017, and the resignation of MD Anderson’s president this March, a glimmer of hope emerged. The institution’s operating margins were in the black in the first quarter of 2017, according to the Houston Chronicle.
Making Sense Of Hospital Struggles
The challenges confronting these hospital giants mirror the difficulties nearly all community hospitals face. Relatively flat Medicare payments are constraining revenues. The payer mix is shifting to lower-priced patients, including those on Medicaid. Many once-profitable services are moving to outpatient venues, including physician-owned “surgicenters” and diagnostic facilities. And as one of the most unionized industries, hospitals continue to increase wages while drug companies continue raising prices – at three times the rate of healthcare inflation.
Though these factors should inspire hospital leaders to exercise caution when investing, many are spending millions in capital to expand their buildings and infrastructure with hopes of attracting more business from competitors. And despite a $44,000 federal nudge to install EHRs, hospitals are finding it difficult to justify the investment. Digital records are proven to improve patient outcomes, but they also slow down doctors and nurses. According to the annual Deloitte “Survey of US Physicians,” 7 out of 10 physicians report that EHRs reduce productivity, thereby raising costs.
Harsh Realities Ahead For Hospitals
Although nearly every hospital talks about becoming leaner and more efficient, few are fulfilling that vision. Given the opportunity to start over, our nation would build fewer hospitals, eliminate the redundancy of high-priced machines, and consolidate operating volume to achieve superior quality and lower costs.
Instead, hospitals are pursuing strategies of market concentration. As part of that approach, they’re purchasing physician practices at record rates, hoping to ensure continued referral volume, regardless of the cost.
Today, commercial payers bear the financial brunt of hospital inefficiencies and high costs but, at some point, large purchasers will say “no more.” These insurers may soon get help from the nation’s largest purchaser, the federal government. Last month, President Donald Trump issued an executive order with language suggesting the administration and federal agencies may seek to limit provider consolidation, lower barriers to entry and prevent “abuses of market power.”
With pressure mounting, hospital administrators find themselves wedged deeper between a rock and a hard place. They know doctors, nurses, and staff will fight the changes required to boost efficiency, especially those that involve increasing productivity or lowering headcount. But at the same time, their bargaining power is diminishing as health-plan consolidation continues. The four largest insurance companies now own 83% of the national market.
What’s more, the Centers for Medicare & Medicaid Services (CMS) announced last week a $1.6 billion cut to certain Medicare Part B drug payments along with reduced reimbursements for off-campus hospital outpatient departments in 2018. CMS said these moves will “provide a more level playing field for competition between hospitals and physician practices by promoting greater payment alignment.”
The American healthcare system is stuck with investments that made sense decades ago but that now result in hundreds of billions of dollars wasted each year. Hospitals are a prime example. That’s why we shouldn’t count on hospital administrators to solve America’s cost challenges.
Change will need to come from outside the traditional healthcare system. The final part of this series explores three potential solutions and highlights the innovative companies leading the effort.
https://www.beckershospitalreview.com/finance/advocate-health-care-s-net-income-falls-27.html
Downers Grove, Ill.-based Advocate Health Care saw net income fall as expenses climbed in the third quarter of fiscal year 2017.
The nonprofit health system reported net income of $169.6 million in the third quarter ended Sept. 30, according to unaudited financial documents. That is down 26.8 percent compared to $231.8 million in the third quarter of 2016. Advocate Health Care attributed the decrease to lower return on investment in the most recent quarter compared to the same period last year.
At the same time, the system reported a 13.8 percent increase in expenses. Advocate Health Care recorded expenses of $1.5 billion in the third quarter of 2017, up from $1.3 billion reported in the same quarter of 2016. The uptick in expenses reflected inflation increases and labor costs, with Advocate Health Care posting a one-time expense of $10 million for employees accepting early retirement plans.
Advocate Health Care also saw revenue increase 13.8 percent to $1.6 billion in the third quarter of this year compared to the same period in 2016. When excluding the elimination of revenue under contracts with the system’s physician arm, Advocate Physician Partners, total revenue reflected higher admissions and medical group visits, among other factors.
Advocate Health Care ended the third quarter of 2017 with operating income of $56.2 million, up $7.2 million from the same period in 2016. The system attributed the change to higher inpatient volumes and payment rates. Advocate Health Care achieved the same operating margin for the third quarter of this year as the third quarter of 2016: 3.6 percent.
https://www.beckershospitalreview.com/finance/mayo-clinic-s-operating-income-more-than-doubles.html
Rochester, Minn.-based Mayo Clinic recorded operating income of $182 million in the third quarter of 2017, more than double its operating income of $86 million in the same period last year, according to recently released bondholder documents.
Mayo saw revenues climb 9.3 percent year over year to $2.97 billion in the third quarter of 2017. The financial boost included an increase in patient service revenue and premium revenue.
The system kept its expenses in check in the most recent quarter. Mayo said expenses rose to $2.79 billion in the third quarter of this year, up 5.9 percent from the same period of the year prior.
Mayo’s operating margin in the most recent quarter was 6.1 percent, compared to the third quarter of 2016, when the organization recorded a 3.2 percent margin.
http://www.healthaffairs.org/doi/abs/10.1377/hlthaff.2015.1193?journalCode=hlthaff
The issue: More than half of U.S. hospitals lose money, at least on patient care. But some hospitals are very profitable, with the top 10 earning more than $163 million, the authors report. Crunching the data points to some important factors in whether hospitals make or lose money, including whether they are part of a large hospital group, enjoy market or regional dominance, and have a higher proportion of patients covered by private insurance.
The takeaway: A hospital’s status as a nonprofit or for-profit has virtually no significance when it come to the question of making money—but other factors, like local market power, make a big difference.
To identify the characteristics of the most profitable US hospitals, we examined the profitability of acute care hospitals in fiscal year 2013, measured as net income from patient care services per adjusted discharge. Based on Medicare Cost Reports and Final Rule Data, the median hospital lost $82 for each such discharge. Forty-five percent of hospitals were profitable, with 2.5 percent earning more than $2,475 per adjusted discharge. The ten most profitable hospitals, seven of which were nonprofit, each earned more than $163 million in total profits from patient care services. Hospitals with for-profit status, higher markups, system affiliation, or regional power, as well as those located in states with price regulation, tended to be more profitable than other hospitals. Hospitals that treated a higher proportion of Medicare patients, had higher expenditures per adjusted discharge, were located in counties with a high proportion of uninsured patients, or were located in states with a dominant insurer or greater health maintenance organization (HMO) penetration had lower profitability than hospitals that did not have these characteristics. These findings can inform policy reforms, while providing a baseline against which to measure the impact of any subsequent reforms.
Englewood, Colo.-based Catholic Health Initiatives’ revenue growth was restrained in the first quarter of fiscal year 2018 due to Hurricane Harvey, and the system ended the period with an operating loss. However, like many systems, it benefited from higher investment income.
CHI’s operating revenues remained virtually flat year over year at $3.7 billion, according to recently released unaudited financial documents. CHI said its operating results for the first quarter of fiscal year 2018, which ended Sept. 30, were negatively impacted by Hurricane Harvey, which caused the temporary evacuation and closure of two of its facilities in Texas in late August. Due to a volume shortfall caused by the hurricane, CHI’s Texas region took a $25.8 million hit.
After factoring in expenses and one-time charges, CHI ended the first quarter of fiscal year 2018 with an operating loss of $77.9 million, compared to an operating loss of $180.7 million in the same period of the year prior.
Fueled by an increase in investment gains, CHI recorded a net surplus of $135.3 million in the three months ended Sept. 30, compared to a net surplus of $36.6 million in the same period a year earlier.
Dean Swindle, CHI’s president for enterprise business lines and CFO, said the system continues to make progress in efforts to turn around its finances. “We did not expect an organizational turnaround to be quick or easy — but we have made substantial progress in recent months and expect that trend to accelerate throughout this fiscal year,” he said. “We’ve taken all the necessary steps in our transformation to a higher-performing organization — and we certainly expect the numbers to reinforce that as we move through the 2018 fiscal year.”
CHI has been pursuing a merger with San Francisco-based Dignity Health since October 2016, and CHI said the two organizations are in the final stages of the due diligence process. On an earnings call in October, Dignity Health Senior Executive Vice President and CFO Daniel Morissette said the complexities of the deal are compounded by headwinds expected in the healthcare industry and the cultural components involved in marrying two large health systems.
CHI has operations in 17 states and includes 100 hospitals. Dignity Health has 39 hospitals and operates in California, Arizona and Nevada.
But it’s rapidly becoming less so. Since I wrote this column years ago, the pressures on standalones have only increased.
Hospitals that are part of a system do far better financially than their counterparts.
“Over the past two years, we’ve noticed that the single greatest indicator of success for hospitals is whether or not they’re part of a multi-hospital system,” says Scott Phillips, managing director of Healthcare Management Partners, a Nashville-based turnaround and consulting firm that focuses on hospitals that are experiencing financial challenges and is led by experienced former C-level executives such as Phillips.
“Just that one factor provides a bottom-line advantage of four to nine percentage points [in profitability], which is almost insurmountable.”
Not that financial success is the overarching goal of healthcare—especially in nonprofit or government-owned healthcare, which still makes up 78.7% of hospital systems, according to Kaiser Family Foundation. But as I’ve heard countless CEOs say, “no margin, no mission.”
As a standalone hospital, you’re distressed almost by definition, Phillips says.
The firm’s data, based on Healthcare Cost Report Information System (HCRIS) data from more than 200,000 Medicare Cost Reports filed by hospitals, nursing homes, home health agencies, and other providers since 1994, supports this contention overwhelmingly. Standalone hospitals still represent roughly a third of hospitals and 30% of the beds, but they tend to be small, and are disproportionately government- or health district–owned.
When you look at standalones closely, Phillips says, usually they’re not in a position to choose their own market in any way, and single-market nonprofit systems haven’t wanted them as acquisitions for those reasons. This dynamic creates an increasing canyon between the so-called “haves” and “have nots.”
“For the have-nots, life is getting increasingly difficult,” he says. “Will many, or even most of those hospitals continue to operate inpatient beds?”
Maybe they shouldn’t. And maybe they should instead switch to providing ambulatory health services.
Many standalones have such an increasing disadvantage, he says, that they, and healthcare costs generally, would be better off if they could convert. But many can’t afford the investment to do so in either dollar terms—access to capital—or in political will.
“If they can convert to diagnostic and ambulatory centers, they would be very busy,” Phillips says.
To convert into an attractive ambulatory center is a $6 million to $10 million investment, he says, and most of them don’t have that money.
Phillips says HMP’s data shows that every year in the system hospitals, particularly the larger hospitals, management keeps getting better. Hospitals in the top two quartiles keep getting more profitable in spite of the uncertainty around the changes in healthcare’s business model from volume to value, he says. They’re getting that principally through greater economies of scale but they are extracting more profitability at the expense of their competitors.
One of the bigger differentiators in terms of profitability is in labor efficiency, he says, the biggest element of cost.
“There’s a pretty dramatic difference in labor costs between hospitals that are in systems than are not in systems,” he says.
Government-owned hospitals are further challenged in this regard in the form of pension costs.
Secondly, standalone hospitals are in 90% of the counties in the U.S., many, if not most, of which are experiencing loss of population, he says. People are moving into cities, not into the hinterlands.
“Healthcare, whether you’re talking nursing homes or hospitals, is essentially a fixed-cost business,” Phillips says. “If your population is declining, your demand for services will decline. So the best you can hope for is an increasing share in a declining market.”
That leads to declines in inpatient utilization, and for a few years, there’s been a dramatic shift from inpatient to outpatient. Another distinguishing trend is that standalones are well behind the curve in reinvestment, particularly in new clinical technologies and information technology.
Phillips says rural areas could be better served by investing in remaking many hospitals into outpatient centers and taking advantage of telemedicine, where state laws and regulations have not made that impossible or impractical.
“It’s insane that state policymakers have not opened that whole market to telemedicine,” he says. “It could be a tremendous antidote to many of the problems these hospitals have.”
Los Angeles-based Cedars-Sinai Medical Center saw operating income fall in the first quarter of fiscal year 2018 as patient revenue declined.
The nonprofit medical center recorded revenue of $791 million in the three months ended Sept. 30, down about 2 percent from $810 million reported in the same period last year, according to unaudited financial documents. Cedars-Sinai saw net patient service revenue decline 3.5 percent to $722 million in the first quarter of 2018, after excluding the hospital fee program. The medical center achieved less revenue than budgeted in the most recent quarter due to lower Medicare and commercial insurer payments from decreased patient acuity.
At the same time, Cedars-Sinai saw expenses fall in the first quarter of 2018 to $726 million. That is down 1.5 percent from $737 million in expenses the hospital incurred in the same period last year. The decline reflects lower supplies costs and professional fees.
Including these results, Cedars-Sinai ended the first quarter of 2018 with operating income of $65 million, down nearly 11 percent from $73 million reported in the same period a year prior.
Dallas-based Tenet Healthcare has sufficient liquidity and plenty of flexibility from a debt covenant perspective to give the company time to improve its operations or change its strategic direction before it needs to undertake material refinancing, according to a Moody’s Investors Service report.
While Tenet’s leverage is high, its next maturity is $500 million in March 2019. “We believe Tenet can repay this with a combination of cash, which will be increasing due to proceeds from anticipated asset sales, and use of its $1 billion revolving credit facility,” said Moody’s.
The company has no amortizing debt requiring periodic payments, and its bond indentures include no financial maintenance covenants or debt incurrence covenants, according to Moody’s.
Moody’s also noted Tenet’s earnings have longer-term growth potential. Although Tenet’s facilities are generally located in highly competitive urban areas, these areas have growing populations. Across all service areas, Moody’s views Tenet’s ambulatory surgery center business as having higher growth prospects than its acute care hospitals.
Despite financial flexibility, Tenet is facing increasing shareholder pressure, which Moody’s said may lead the company to take more drastic measures, such as larger asset sales or even the sale of the entire company.
Pittsburgh-based Allegheny Health Network saw its operating performance turn around in the third quarter of fiscal year 2017, fueled by higher patient volumes and efficiency.
The seven-hospital system reported operating income of $10.6 million in the third quarter ended Sept. 30, according to unaudited financial documents. This is a year-over-year improvement from the network’s $17.6 million operating loss in the third quarter of 2016.
Dan Laurent, Allegheny Health Network’s vice president of internal and external communications, told Becker’s Hospital Review the positive performance reflects increased physician office visits, more efficient operations, readmission reductions and favorable payer contracts, among other factors.
The health system recorded revenue of $771.3 million in the third quarter, up from $711.7 million in the same period a year prior.
At the same time, the health system saw expenses widen to $760.8 million, compared to $729.3 million during the third quarter of 2016. Mr. Laurent said the system’s third quarter financial performance reflected investments in expansion and renovations at Natrona Heights, Pa.-based Allegheny Valley Hospital, Saint Vincent Hospital in Erie, Pa., as well as an Epic EHR implementation at its Jefferson Hospital in Jefferson Hills, Pa.
Overall, the system recorded net income of $13.4 million in the third quarter of this year, up from a net loss of $16.3 million in the same period last year.
HENRY KOTULA 